Business Models

Some business models were made to last. They were not blunder. They were carefully thought out and planned. Today a number of companies stand out not because they are doing anything fancy but they are simply tweaking and in some cases reshaping a business model established years ago, adjusting it to changing tastes and times. You and I seek to profit from some of these models that were set up decades or even centuries ago. This is the reason we wake up everyday and look forward to identifying the right investments and assessing them in order to profit from their activities.

The last time I wrote I spoke of Dairibord as a company that I said was well managed and recommended it as a BUY. It was 12 cents then. Today Dairibord is sitting at 17.1cents, a gain of over 42.5% in 45 days. Dairibord’s business model was well thought and made to last. I am not taking anything from management here. Keeping it together is not something you just pick up along the way. It takes great effort and planning to keep a company with a good business model on track.

Delta’s latest financial results also speak volumes about the importance of having a management that is in touch with reality. Delta posted an after tax profit of $20million for the six months to September 2010. The second half from October to March 2011 is what we will focus on here. Historical numbers are a good reminder that the ship is still on course. The company saw an increase in volumes across all its lines except sorghum based beer which was down 4%. This excites me. The company anticipated the demand for its products and is geared to meet it. That means more revenue is expected and with that better profits. The profits are not as a result of price increases there were none during the just ended period.

It is nice to see some companies taking advantage of the current environment. Listening to Joe and his team speaking about what they are doing, you can see where they are going. Sadly the same cannot be said of a number of companies that are operating in our promising economy. Having a profitable business model and making it profitable are two different things. Delta, Dairibord and Econet have all identified their space in Zimbabwe and are doing everything to defend that position. Who benefits in the end? It is the investor who has patiently waited because they know they have invested in the right company.

I had a chance to listen to Strive (Econet) speak about the telecommunications industry in Africa and saw how simple his idea was. http://www.youtube.com/watch?v=ECOKKj-TkV4. It may not be easy to build a telecommunication networks but who can argue with the fact that the tools of communication that we use in our everyday lives will be with us forever. They will evolve over time but the truth is that in the same way we need water we need to communicate. To me it is an important part of life. Without it something is missing. Am I going to stop buying airtime for me to communicate, its unthinkable! It is fast becoming a right, like the right to food and shelter! Strive probably never thought about this as he was setting up Econet, but today he has build a company that has an everlasting business model.

The challenge in many companies is not that they don’t have the right business model, it is their failure to take full advantage of their situation by anticipating what the market needs and attending to them. In Delta’s case the investment of over $70 million was meant to address the supply bottlenecks and the brand concerns that had seen the economy flooded by imported beverages. Today Delta’s brands trade side by side and are preferred by consumers. This is because Delta had the right products in the first place. Today Delta’s management is matching blow for blow its competition’s strategies and guess who is winning, the investor!

I know I now sound like a friend of mine who is in the marketing business pitching for brand management account. It is interesting though isn’t it that the thing most company executives ignore as marketing stuff ends up affecting profits and ultimately shareholder value. One might ask what Delta’s reengineering of its brands or Dairibord’s repackaging of its brands has anything to do with investments or profits. Now you know.

Sitting shareholders often wonder why the share prices of the companies they are invested in never do well, when the companies themselves are profitable. Sometimes investors see a good business model, they see the future and when that future is spoiled constantly by failures to take full advantage of good fortunes companies are facing they resign in protest and move on to companies that are doing so. Investors want management who don’t leave a cent on the table. They want management that takes full advantage of good times. Remember good times don’t last for ever.

In my parting shot, I leave you to think about some companies that have been long forgotten on the ZSE. Perception is hurting some of them but they are in the right areas. They may also be need of some reengineering and capital: Turnall, African Sun, Pelhams, Afdis, Caps, Cairns, TPH, Hunyani to mention but a few. I am not saying that these companies are profitable or will be in the short term. With the right amount of work, the business models that these companies have can turn them into giants.

Mining sector

Many investors are gathered in Harare to explore opportunities in Zimbabwe's mining sector. http://www.zimminingindaba.com/ The conference started yesteday. Following today’s (16/09/2010) gains on Zimbabwe’s mining index, I thought it fit to dig up some of my incomplete articles for this blog and I found something interesting. I had started to write this a few months ago, around June 2010 to be exact.

Investors on the Zimbabwe rarely look at mining counters because they are not easily understood, yet the world economy revolves around resources such as Gold, Platinum, Nickel, Silver, Oil, Coal, Diamonds to mention but a few. For many years Zimbabwe’s mining industry has operated under very difficult conditions. Controls, lack of equipment and machinery, inefficient processes. The list is long.

In Zimbabwe price controls saw producers pulling out because they could not sell precious metals directly to the world markets. As a result Zimbabwe’s minerals are largely unexploited. Because of the problems in Zimbabwe major players skirted our resources in favour of our neighbours South Africa (gold and platinum) and Zambia (copper and nickel).

In the early 80s Zimbabwe had the likes of Ashanti, Anglo, Rio Tinto, and BHP among other big mining houses and the industry employed more than 20,000 people directly. Drive around Harare and see the buildings owned by the Mining Industry Pension fund and you will appreciate just how important the mining sector is to the Zimbabwean economy.

Looking back to what I had begun to write here, it looks like I was onto something. Not only has ZSE listed mining counters been re-rated since then, the country has seen a number of new developments and conferences too! Zimbabwe has reportedly sold over a million and half carats of diamonds. 900,000 carats were confirmed and thought to have earned the country between 30 to 56 million dollars. Some respected mining experts say Zimbabwe (producing an estimated $2b a year) could become the 3rd largest diamond producer of diamonds after Russia and Botswana. (Source http://www.cheap-diamond.com/Countries/)

I will not try and offer any economic analysis as to what this could do for Zimbabwean economy because it is all too obvious! I would rather focus on what you and I as investors or potential investors are doing to benefit from all this. I mentioned earlier that the mining sector is not easily understood. At the time I wrote my unpublished blog in June, Falgold was trading at 3 cents, Hwange 21 cents, RioZim 265cents and Bindura around 12 cents. Today Bindura is trading at 13.15 cents, Falgold is trading at 5.5 cents, Hwange at 30 cents and Rio is the only counter down at 180 cents.

This confirms that the mining sector is on a recovery path but needs capital. Serious money has been put into both Hwange and Falgold in the last two months. Hwange released a pleasing set of results for the first six months of the year, posting a profit of over $4 million on sales figure of nearly $50million. A picture many of us haven’t seen in more than a decade from our listed mining companies! Pinch me, am I dreaming? Hwange actually made money from selling coal and coke. Investors who bought at 20 cents aren’t doing badly. The share price has gone up by 50 percent since June 2010.

Following a change in shareholding at Falgold it seems the company’s fortunes are also set to change. A loss of over $3m in 2009 did not deter New Dawn mining a very aggressive junior gold mining company with big dreams. They are consolidating their gold resources and are aiming to produce 250,000 ounces of gold a year in the long term. In the short term their sights are on achieving 50,000 to 60,000 ounces per year. These guys mean business and have not wasted anytime to get things going. Falgold has seen an injection of $2m into the business, kicking off production long stopped at the height of the country’s economic crisis.

The case for investment in Zimbabwe’s mining sector needs very little selling (I am not trying to sell these companies, the unexplored resources speak for themselves) if you are brave enough to look ahead and are not bothered about politics and the uncertainty that comes up from time to time. If properly structured from the onset, there is room to profit from investments in Zimbabwe. Over lunch I had an opportunity to listen to a Harvard Professor of Strategy being interviewed on CNBC on Sqwuakbox and my jaw dropped when he spoke of the differences between Republicans and Democrats in America and how such differences shape the economy. Yet investors all over the world still chase investments on the Dow etc

The contrast of their views (Reps/Dems) and what needs to be done to revive the economy are so far apart and according to the presenter it is like people sitting on two sides of the road. Listening to the two go at it left me with a smile on my face and with no illusion that no country is without politics and as investors we must find strategies of finding winning investment strategies within the political space that we find ourselves and just hope for the best. I wish it was that simple. Let me leave politics to politicians!

I have just been thing and hoping that it is not too late to pick up of these mining counters. Sadly we only have 4, I wish more would come and list! Hwange is certainly still good to go as they say! It is trading on a forward P/E of 5.5 times if we assume that it will make another $4 million in the second half. Where is RioZim in all this? The company owns about plus or minus 19% of Murowa Diamonds which made a loss after being caught up in the Diamonds debacle that faced the country this year.

Rio is saddled with a huge debt and is attempting to raise $40 million to get back on stream. A search for a technical partner is also on. The sad story ends there. Its amazing to see the resources Rio sits on. A huge coal deposits is one of many of its many assets. RioZim sees itself solving Zimbabwe power shortages for good by 2014 when its 2400MW PowerStation comes on stream. If one is ready to wait for a 3-4 years this is one good strategic investment. We all know of power issues saddling SADC countries.

Another company in the mining sector is Bindura. Production is scheduled to restart soon. There are plans to sell off part of the mine to raise capital. I wont repeat what I have already said about Falgold.

Enough about the mines, Its now time to focus Dairibord which was 7,1 cents in June 2010 is now trading above 10 cents, 12 cents to be exact, thanks to a good set of half year results. I wrote about Dairibord sometime back highlighting how well managed this company is and that it would be a good investment for anyone looking for exposure in the food and bev sector. The company appears to be a solid path and is poised to grow. Walking in the CBD today, I saw and smiled at how their business model is so right for what they are trying to do. I saw at least a dozen people holding a choc ice to beat off the summer heat! The Ice cream machine is up I see.

Recovery signs evident in Zim

It is official. Zimbabwe’s economy is definitely on a recovery path. One doesn’t need to look far to find the proof.

• An improved tax revenue collection by central government. $200m more collected than was previously budgeted.
• Dramatic shift in tax revenue structure. VAT now contributing more than 36% to total revenue collected.
• There has been a rise in deposits in the banking sector. June – $1.8bn – driven by increased tobacco, gold and diamond sales.
• National Milk production is up 30% compared to June 2009. The country is now producing 3.7m litres of milk per month.
• Volumes are on the increase in many companies that have released results. Zimplow, Delta and Dairibord have so far seen an increase in volumes of between 30 and 50%
• Barclays bank recorded an operating income of nearly $20m in the sixth months to June 2010, double that recorded for the whole 12 months in 2009.
• Gold mines continue to acquire and develop new mines. To date 4000kgs of gold have been produced, same as what was produced in 12 months last year.

Although we are yet to hear of big factories opening up we are certainly in no doubt that the economy is not in decline anymore. One thing that makes it difficult for any economist or analyst in this part of the world is the lack of firm and reliable data. We cannot talk about job numbers, productivity indices etc. Here a lot of emphasis is placed on the Consumer Price Index (CPI) popularly known as inflation. It too slowed down from 6.1% to 5.3% in June 2010.

Other measures that gauge the level of productivity and business confidence are simply not relied on because the information is unavailable. One might ask why I think the above points that I listed lead me to conclude that the economy is recovering. Call it a sixth sense I think Zimbabwe will surprise us all. After all this is real money we are talking about! At the end of day what we are seeing points to the fact that there has been an improvement in economic fundamentals.

At a micro-level there is more evidence to support my assertions. Dairibord -http://www.dairibord.com/dairibordzimbabwe/, a company involved in food and beverages sector has seen increases in volumes of more than 30% in the first 6 months of 2010. PAT for June 2010 was $2.9m. DZL normally enjoys a better second half so we should expect some good numbers for the full year. At 7.3cents, a market capitalization of $25m, DZL is cheap.

Developments on the stock market since the beginning of the second quarter of 2010 have hardly mirrored this positive story that is showing in the economy. I find this disturbing because it means that negative perception is overriding the good story that is building up for Zimbabwean investments.

What is reassuring though is that hardly a day passes without a few big deals being conducted on the stock market, a sure sign that some investors are looking past the doom and gloom.

Over the past week there has been an accumulation of a number of shares in Delta, Ariston, African Sun, Dawn, Pearl, Mash among others. Although share prices have not reacted to this renewed buying interest, buyers are slowly coming back to the market. They seem to be looking for bargains and they are getting them indeed! The whole ZSE has a market capitalization of $3.3bn.

So what is happening to the Zim markets?

Everyone I meet is increasingly worried and is asking me this very question. With the ZSE’s main industrial index down 17% since December 2009, it is not surprising that anyone with investments on the ZSE is worried. In years gone by such a drop would not lose anyone sleep, but now that we are in a hard currency environment everyone wants to know what has gone wrong. You can’t watch your portfolio lose 17% in 6 months and wish it away! Put into perspective if you had $1000 cash in January and you put it under your pillow it would be $1000! On the stock market assuming you had bought the industrial index in total and sold off your positions today you would have $830. On the money market 30–day rates have fallen to between 6-8% from 12-15% in the last few months. You would have slightly more than $1000. There is really nowhere to run to! Suddenly guys who held onto cash appear smarter!

Zimbabwean markets are driven by liquidity and really this is true of all markets in the world. Ceteris paribus (All other factors being constant), as my professor in college used to say, too much liquidity on the stock market sees higher share prices. On the other hand too much money on the money market has exactly the opposite effect. The improvement in liquidity in the country, though this is not very apparent, has seen a massive fall in investment rates. Over the last quarter Zimbabwe has seen a huge improvement in liquidity as a result of a number of factors:

1. Banks have scaled back their lending after realizing that borrowers were failing to pay back loans, as a result of a slowing down of economic activity. Remember lending was being done at rates of between 20-35% per annum since dollarisation began.

2. On the other hand some companies have repaid their loans following successful Rights Issues. Art, Afrisun, Star Africa, OK Zimbabwe are some of the companies that come to mind. Estimates put the amount returned to banks at over $40m in the last quarter alone.

3. Market efficiency is an amazing thing to watch in action. Lending rates elsewhere in the world are around 1% per annum. Slap in your risk premium and charges companies in stable markets rarely pay 3% per annum for their debt. Over the last few months a lot of money has entered Zimbabwe in search of better returns. Coupled with the fact that Zimbabwean companies are allowed to borrow up to $5m without seeking Exchange control approvals, cheaper money has been taken up by companies from investors seeking higher returns.

4. A number of local companies have no reason to borrow now that dollarisation has exposed the inefficiencies in our economy. Capacity utilization which sat below 15% in 2008 has been upped to between 40 and 60% and it appears Zimbabwe is doing just fine with this level of production in the economy. This has eased the demand of money in the economy lowering lending rates.

Some companies have quickly adjusted their business models to counter their inefficiencies, but most have not been so lucky. Layoffs have increased dramatically and a number of listed companies are expected to let go of hundreds of workers. This comes at a huge cost and unfortunately means that Pensions Funds will continue to sell off their positions to meet their obligations further depressing the market. Everyone had 80-100% exposure to the stock market during hyperinflation.

What does this mean for all of us? Well it means that the stock market is not a place were we can invest blindly and hope for the best! A lesson has been learnt. But clearly we didn’t have too many choices during hyperinflation. Buying forex was illegal and seems to have been the best and only way to preserve value. Those who bought physical assets are in worse shape compared to those who bought shares.

Forget the politics I always say. It will always be there! The good thing about Zimbabwe at the moment is that we are in a hard currency economy and so there are no short-cuts. There is no printing of money. Actions have consequancies. So to answer the question what is happening to Zimbabwe?

I say things are happening but not as quickly as we would like to see and sadly it is not entirely our fault as market players. The whole world is lurching from one crisis to another and countries like Zimbabwe that have started to recover are at the mercy of the world economic crisis, that has seen drying up of credit, falling investor confidence, a fall in aggregate demand and investor apathy.

This is no time to sit back and relax. Governments across the world are trying shore up investor confidence and doing everything to attract money from those that have it to improve economic activity. Zimbabwe needs to do the same if we are to see more jobs being created in our economy.

Delta is looking strong

Turnover in excess of $300m for the 12 months to March 2010 helped Delta http://www.delta.co.zw/ meet most analysts' earnings expectations. In short we are drinking as much as we are making phone calls on Econet's mobile network! Econet recorded $362m in sales in the year ended February 2010.

The results which were released this week, reinforced the view that Zimbabwe's economy is very much back on track. In support of this Delta recorded a doubling of volumes in some of its lines. The return of previously discontinued lines such "shake shake" opaque beer returns Delta to its old self. Operating margins were 16%, management is happier with 18-20% and was confident that this will be achieved.

Like Econet, Delta is now pushing sales of over $30m every month. As long as the economy remains stable, Delta will maintain or even grow these revenues and is on course to paying a dividend in the interim period of 2011. Management did well to offload non-core businesses increasing the focus on volume growth and cost containment.

With a market capitalisation of $550m, Delta is one Zimbabwe's biggest companies. Profit after tax was $35m. I was expecting $47m. Too optmistic you might say! Unfortunately not everything went according to plan. The late commissioning of their new bottling plant, unreliable water and electricity supply cost the company in the second half resulting in the company failing to take full advantage of peak time demand. It is interesting to note that sales have remained strong going into April 2010. $37m was recorded.

What is exciting about Delta is how it has stood the test of time. This is why it is called a Blue chip stock. I will be the first to admit that i thought foreign beers had taken over and Delta's beers would never sell! If you thought so too, think again. Local beer volumes are growing and constitute more than 95% of the consumption in the country! Infact sorghum based beer constitutes the bulk of beer consumed in the country.

So it does look like, for any problem that comes its way, Delta have an answer. In the area of premium brands it has Peroni and Miller's, which compete with your Heineken and Windhoek respectively. Dont ask me how i know that.

All in all i would say Delta is worth keeping in any long-term portfolio. BUY on weakness. HOLD for solid long term returns and a dividend.

ZSE shares still attracting investors

The stock market has failed to build on previous gains recorded at the end of the first quarter, as investors have all but retreated. Trading has become so unpredictable these days. The value of shares traded on the ZSE is ranging from less than $500k to $1500k per day. Meanwhile corporate actions have gained momentum on the market, with the last company to come out in search of new capital being NMB http://www.nmbz.co.zw/. Despite having faced a fair share of problems including frauds, NMB has remained a strong institution and has managed to retain some of good clients.

The company is seeking to get shareholder approval to raise $7.1m through a private share placement with African Century Financial Services Investments LLP. http://www.africancentury.co.uk. Zimbabwe’s banking laws require a commercial bank to have $12.5m as capital. The effective dilution to be suffered by current shareholders will be around 32%. Pretty high, but there is really no other option is there? The money must be raised or else sitting shareholders will be left with no business! The RBZ has been very clear on what will happen to banks that are undercapitalized.

So all in all, I think this is a good move by the NMB board. What is important going forward is to make sure that the bank does not lose money again through fraud (its pleasing though to see a significant amount of money that was lost through fraud was written back to the income statement in 2009). The new IT system will go a long way in plugging some of the loopholes no doubt! $1m is earmarked for the upgrade of IT systems and upgrades.

The first quarter of 2010 has come and gone. It was not an easy quarter for anyone in business it seems. Apart from liquidity problems, a lot of uncertainty was seen regarding the country’s future as parties to the GPA continued to negotiate. Investment markets appeared directionless and never really went anywhere. The industrial index was down 8.70% in Q1. Mining index was up 16%, as a result of gains in Rio Tinto,

Business conditions in the first quarter of 2010 were tough for most companies. The problem was not that companies were failing to sell products. They were failing to collect their money from the sales. This problem is being seen across many companies and is a mere reflection of the tight liquidity conditions in the country as a whole. It looks like we are in a bit of a depression. For business confidence to rise we must see a buildup of liquidity and a softening of lending rates across our banks.

When businesses sneeze the stock market chokes. Remember we are all in the stock market because we expect to get some returns. A disturbing trend being noted among a lot of companies is the scaling down of operations and tightening of trading terms. You either pay cash or you don’t get the product.

As we go into the second quarter, what can we expect? No-one really knows but its increasingly looking likely that there will be an improvement in activity. Commodity prices on the international markets are looking up with Palladium, Copper, Gold, Nickel and Oil showing strong gains.
In terms of corporate actions as already pointed out we will see more companies coming to shareholders. The more we see companies getting new capital from investors the better the confidence levels we have in our stock market. OK managed to get a subscription rate of 70.4% for its rights offer. The appetite for good investments is definitely still there

This and that!

GNU discussions appear to be yielding something if we are to believe what we read in the newspapers and the country could finally be moving forward after the 31st of this month. Clearly Mr Zuma’s visit was not in vain. Following the marathon meetings over 2 and half days, it was reported that a “package of measures” had been agreed that would see the GPA move forward “substantially”. Now isn’t that what we have been waiting to hear?

Barring goings on elsewhere, (the Indigenization debate and early elections talk), this is the best news yet, this side of the year and investors on the stock market seem to agree! The industrial index picked up 2.98% on Tuesday on the back of broad based gains in blue chip counters. This gain is the third in as many trading sessions. Nearly $6m worth of shares changed hands Tuesday. A further $1,2m changed hands on Wednesday, with the industrial index climbing by a further 2.70%, bring the year to date movement to -9%. As pointed a few weeks ago, interest has certainly returned to the market, which had seen prices tumble to rock bottom levels in the past fortnight.

Last week we touched on the catalysts for a broad-based gain on the market and reiterate that position this week. Improved liquidity and improved sentiment will see that market record significant gains. For now investors will do well to take advantage of wide price swings that have become the order of the day on the ZSE. The most amazing being Meikles, which had sunk to 30 cents since being re-listed but is now being bought happily at 40 cents. Looking at the value of assets in Meikles and considering that KFHL is still part of the group, it should be trading at a price not less than 75 cents. Yes, the company is still making losses, but the some of parts valuation definitely warrants a price of at least 75cents.

What does Investec see in Zimbabwe that others don’t? (I say so because they are also invested in Falgold) Value and Potential! The company is chasing value and getting it. Investec is the underwriter to a $15m Rights issue approved this week and has extended a 5-year loan at 12.5% to OK. OK is what one could call the largest and most well-known retail brands in Zimbabwe. The company is best known for its “OK Grand Challenge”, which I remember as a kid. “Back in the day” when the Zimbabwe dollar was still a dollar! I remember my parents doing groceries there and I would be so excited to find out what each coupon in store for us. We never won anything substantial but we did it anyway. Now that’s successful marketing. Today I still shop there with my family and that tells you something about OK. It’s a well run company that will be here for generations to come.

News reaching me is that we will see some more big rights issues in the second quarter. Talking to some people that know what is happening, there is a total of $170m that is wanted by 3 companies in the second quarter of this year. Now that’s a lot of “dough”. No doubt there will be a need for agile investors like Investec to come in and underwrite. I am really excited about the ZSE and the type of money it is attracting into our economy. This is real investment and for once the ZSE is doing what it is supposed to do, that is raising affordable equity capital. Yes there is massive dilution for us as local investors, but we will be the winners in the end.

I say this because, over the last decade we have not invested in any of our business in a meaningful way and clearly without new investment, we will not be able to salvage anything from our companies. Enough said! Have a great week.

Rather Sad week

This week has started out on a depressing note for me. Sam Mtukudzi, a promising young man passed on after a freak car accident on Monday morning. He was a musician and son to Oliver “TUKU” Mtukudzi. I watched Sam perform on a few occasions and his performances were wonderful and stood out as his own. His father Oliver drew me out to him and the first time I watched him perform I like everyone else saw a bright and colourful future for the young man. The loss of Sam is a very painful one. In fact it is tragic. Yet life must go on. My heart goes out to Oliver’s family. Tuku’s music has special meaning to me.

Anyway, back to the markets where value traded on the ZSE picked up somewhat last week. We saw daily trades of over $1.2m from as little as $360,000 the previous week. There are a number of reasons for this, the first being that the industrial index is down 10.79% since December 2009 and mining shares are down by 14.4% over the same period. So investors may be looking at stock prices and chasing bargains again. When one drills down the detail, there are most certainly a few bargains to pick. We will look at some of these later.

The second and most important reason is that there has been some improvement in liquidity in the stock market. This sounds more credible. Following the authorities’ move to allow PPC to be traded on the JSE, unconfirmed reports say 6m shares have already been moved out and at a price of $4.31 per share that’s a cool $26m that could potentially be chasing shares on the ZSE. Trades have certainly picked up and there have been a few big trades in the last week or two mostly in Old Mutual, NMB, Interfresh, Econet, CFX, Dawn, OK, and Delta, which is evidence of some portfolio restructuring.

The third reason, albeit not so important right now is still linked to the second. The tobacco selling season has increased the number of trading days and so far over $7m worth of tobacco has been traded. The filter through effect of this could also be seen in the picking up of value traded on the stock market. An improvement in liquidity remains the key to unlocking value on the ZSE.

I want to add a forth reason that may indirectly be leading to a picking up of trades on the market. Though not plausible, it is my hope that investors, (especially foreign) see it that way. When the empowerment law came into effect on the 1st of March 2010, no company was taken over as most feared would happen. Ok, that is a bit dramatic, I agree! But my point is that investors are a little more comfortable about the law now that it is being discussed openly and the politicians are interfacing with the public to elicit their views. The rumour milk is suggesting that a truce has been reached and exemptions given to ZSE listed companies. I can’t confirm this but hey, there is no smoke without fire, they say and I agree. Whatever is happening, it is clear to me that the current law will not proceed and be effective in its present form, because it has too many flaws and will be amended to take into account a few important things such as:

1. Definitions (who qualifies and what levels)
2. Property rights protection
3. Funding Structures and capitalization
4. Level of ownership
5. Creation of jobs and economic value addition
6. Constitution of a body to ensure transparency and accountability

My final reason why there seems to be life in the stock market once more is the fact that Mr. J. Zuma is in the country following dinner with the Queen and British officials two week ago. Call it the “Zuma Factor” if you want. Mr Zuma, who is current chair of SADC is in the country for a two and half working visit (Fairly long, wouldn’t you say. He is not expecting things to be easy but he is showing deep commitment by staying this long). A way forward must be found but it will not be easy. The three parties to the GPA are failing to agree on how to proceed. Elections as early as next year have been mentioned.

I think I have dwelt enough on the reasons for the sudden burst of life on the ZSE. Those of us who like to buy and hold for a return on the stock market will have watched some counters drop day after day since the beginning of January 2010. The worst hit are Pelhams - 69%, Afrisun - 63% Ariston - 54%, Caps - 52%, Red star - 50%, General Beltings -50%, Art - 47% , Nicoz - 45%, CFI - 43%, Fidelity - 42%, Zimre - 40% Meikles -39%, Truworths - 38%, Radar -38% , Mash – 33%, Falgold -31%, PGI -29%, Star Africa -27%. The list is not exhaustive. But you get the picture. Most of the counters have had a fair share of problems, be they capital, markets or shareholder related. If I was asked to pick any counters out of these battered ones, I would have to say Mash and Truworths have no reason to be languishing with the rest! Their results prove it. The next batch I would take out of the worst performers’ basket would be Afrisun, Star Africa and Art because they are doing something to change their fortunes by recapitalizing.

Still some money has been made on the ZSE since the beginning of January 2010. Much of it in unlikely counters! Powerspeed +67%, ZPI +50% PPC +42%, Zimplow +20%, Astra Industries +20%, Colcom +17%, FBCH +14%, Steelnet +14%, Border +13%, CBZ+10% TSL +8%, Apex +8% DZL +7%, Chemco +6%, TN +5%. So there you have all has not been gloomy on the ZSE after all!

Financial results start pouring in

Financial results for the period ended 31st December have started coming in and as expected they are very mixed. Most manufacturing companies are struggling save for a few. Management is citing dollarisation as the main cause of losses. Bear in mind that these results are the first to be published in a completely dollarised environment. A key feature seen on most income statements is non-recurring items arising from retrenchments and business restructuring.

Here are some of the results:

1. Apex posted a turnover of $7.3m for the year, but had an operating loss of $207,000 and an after tax loss of $1m. The company which mainly services mines did not receive meaningful orders. Demand is expected to grow in 2010 but working capital is lacking.

2. Barclays bank which had $121m in deposits and $20m in loans posted a profit after tax of $1.4m in 2009. Always known to be conservative, Barclays earned the bulk of its income from non-interest related activities and will continue to do so. Sensible lending saw the bank charge between 12-16% interest, when some companies are reporting an all in cost of over 38%.

3. A turnover of $43.4m saw Dairibord post a profit after tax of $4,6m. Milk intake declined by 43% and probably for the first time in the companies' history, non-milk products drove sales and profits. Food and Beverages contributed 64% of volumes with the balance being liquid milk.

4. Edgars managed to record $11.1 in sales in the 66 weeks to 9 January 2010. High rents and massive finance costs of $626,226 saw the company record a loss after tax of $1.2m. Like most retail companies the challenge was restocking after hyperinflation and price controls decimated stocks. Its difficult to see how Edgars can avoid a rights issue to recapitalise the business with borrowings of over $4.3M at a cost of 38% per annum.

5. A tale of two cities is what this can be called. Truworths operating in exactly the same enviroment posted sales of nearly $6m for the six months to 3 January 2010. PAT was $422,485. Management is doing exactly what the Doctor ordered to remain profitable and relavent. They are importing fabric and finished goods from China. If clothing is your thing then Truworths is the better pick.

What can we learn from the above? To put it mildy we have a worrying increase in gearing levels. Companies that went on a borrowing spree with reckless abandon are now counting the cost, as activity in the economy has slowed down. Margins have plummeted. An explanation given by most companies is that "We had no choice but to borrow in order to stay afloat" In other words some of the borrowing done was not properly considered and now that it is unstainable debt, shareholders must come in and help repay it.

Another less harsh way to look at it is that we are now paying for the sins of yesteryear, when hyperinflation ravaged our investments and depleted our capital. We the owners of the companies must now raise new money in order to rebuild our investments. It is a very painful reality!

No wonder this is a very emotional subject! But should the management of companies be committing to borrow at between 32-38% per annum. With what justification? What business can repay such loans without calling on shareholders to inject new capital? To put this into perspective, most of the loans we are talking about amount to over 30% of the company's market capitalisations. Yes, i maybe generalising, but so what? Does that make it right? There is no reason why a company should take "life threatening" arrangements on behalf of the owners of the company all in the name of staying in business. Shareholders have a right to be told that you have no business left. We are recommending that we close down or we are selling the assets. At least we are left with some residual value!

To me, it appears most company executives have postponed some painful decisions in the hope that they dont have to make them in the near future in the hope that GNU starts working and the economy starts growing. But is that enough? I think its not. Business models must change now that we are in a dollarised environment. If we cant produce a product profitably we must import it. To me it is that simple, but what will happen to unemployment when we have to close companies because they are not competitive. What this highlights is that we still have to make some very tough decisions as a country.

Zimplow posts $2.2m Profit for 2009

The reporting season has started with good news! Zimplow has posted an excellent set of results. I have always been a fan of cash businesses, and Zimplow falls into this category. In the 12months ended December 2009, Zimplow generated nearly $3m. By the end of the period it still had cash amounting to $1m. That is amazing isnt it? for a company that is in the manufacturing sector, making hoes, plows , bolts and nuts, to make a a cool $2.2 million after tax.

This shows you that there is still room for well run companies in the right sector. Zimbabwe's agricultural sector remains a key pillar of the economy with the right policies in place. The company actually saw an increase in its unit sales, even thogh exports were down. Volumes for Mealie Brand its plows and hoes division were up 18% during the year as local distributors started to rebuild their businesses.

These profits were achieved with very little borrowings. I was surprised to see that the company actually has a line on its income statement called Finance income with $57,362. You wont see this line on too many income statements for a long time to come yet Zimplow did it. What is their recipe.

Net Asset Value per share is actually 3 cents at a time the share price is trading at around 2 cents. This is one company that should really be trading above NAV. I wont hesitate to recommend Zimplow as a SOLID BUY.

Enough said!
Want to know more about this company. Visit their website @ http://www.zimplow.co.zw/index.asp

Will the GOOD news lift Investor spirits?

It is not often that you get so much good news in one day on the ZSE. Monday saw a comeback by KMAL (to be known as Meikles Limited going foward after a name change was proposed)on the local bourse, after months of uncertainty. PPC became a fully fungible share, joining OLD MUTUAL . (For those not in the picture, you can now sell your PPC shares if you meet certain conditions on the JSE) Why is this so important? Well PPC on the ZSE is trading at a price nearly half that of the JSE price. No prizes guessing what will happen to the ZSE PPC’s in the next few days if not hours!

You will recall last week that we pointed out that all is not well on the ZSE at the momement. Well, aside from the good news on KMAL and PPC, there is very little else to excite pensive investors. For companies looking to raise money, it is even worse. You can buy the whole of Star Africa for a lowly $25m. They are raising $20 million from the market. This is just one example.

What is happening to our listed companies? I wish i had all the answers. Zimbabwe's listed companies are valued at a collective $4bn. Less than 10 companies account for 80% of this value. In my view the market should be at least double this value. The dillemma facing many company executives today is whether to raise money and risk massive dilution or continue the way things are and risk closure. Most have done the sensible thing, dilute and move foward.


For instance brick and mortar used to be very popular during the heydays of inflation. Investors have largely discounted properties. A look at the market capitalisation of property companies, Pearl ($25m), Mash ($23m), Dawn ($33m)and ZPI ($9m),shows that these companies are cheap. When the economy starts growing, rental yields and property values are expected to rise and infact have started to. Limited development of new sites and a shortage of space has seen rentals double in recent weeks.

My take on the ZSE is that, shares are looking cheap but sentiment is bad so prices wont rise in the short-term. There is also a wait and see mood that has gripped the market. Sadly this means that prices will not move anytime soon, except ofcourse if there is some good news on the GPA front as well as other policy news. As the tobacco selling season wears on expect improved liquidity, which can only push up demand in the economy at large. Investors with money to spend are best advised to take advantage of the market weakness, before improved liqudity hits the market.

In Shona we have a saying that goes something like "Kutaura seune kamuti mukanwa", loosely translated " Speaking as if you know what is going to happen" That is basically what happened with me this week when i spoke of impending corporate actions in the first quarter. Little did I know that OK one of my punts for 2010 was going to come out with an action of its own!

OK (one of the country retailers) is proposing to its shareholders the issuing of 5000 Convertible Loan Notes with a value of $5m, accompanied by a rights issue of 250,375,133 shares at a price of 6 cents a share to raise $15m. The detailed document is not yet out, so i cant really say much. Once I get it i will be able to say more. For now all i can say is we live in very interesting times. Nothing at all is what it seems. I didnt see this one coming but it all makes sense now.

When we talk about the Zimbabwean economy recovering it so easy to forget about where we are coming from and most importantly how desperate our companies are for capital injection. Infact we think companies are just going to start trading profitably without any investment! Although some companies are trading profitably, they are not where they used to be because over the years management focussed their attention to surviving rather than growing. It takes a radical shift in the mindset to take that leap of faith. Many companies are doing it because they have no choice, waiting will only increase the burden and chances of a total collapse.

When i see a rights issue from a company like OK, I see management that is looking ahead and trying to grow the company. Today OK has a market capitalisation on the ZSE of $50million. Injecting $20m will see the company easily double its current market cap. Not all shareholders will be able to follow their rights, that is the sad reality of our situation, on the other hand without recapitalisation the company which used to be the largest retailer in the country will be left behind if not forgoten forever. Its closest rival SPAR is opening new stores. New equity allows the company to restock its stores, refurbish or open new stores etc, thereby remaining relevant.

2010 is certainly a different year in many respects. Breaking with tradition, the tobacco selling season began today (16/02/2010, a whole two months before its normal date.) We need the cash man! Remember in Zimbabwe all tobacco must be purchased from off-shore funds. This is a direct injection of cash into our economy. Some curious statistic that i read is that last year's tobacco crop contributed 26% to the country's GDP. Last year only 42million kgs of tobacco was sold at an average price of $3.60 per kg, generating some $150m.

Those who read the papers last year will recall the number of stories about traders reporting brisk business as small-scale tobacco farmers bought anything they could lay their hands on with their cash. What was not bought! Cars,Fridges, Stoves, Generators, hoes, tractors, trailers, you name it! Many expect and with good reason too that there is going to be a replay of this again in 2010. The crop is expected to be around 77 million kgs and if we are to assume that prices average $3,60 again, the sale will generate close to $280 million. To put this into perspective that is over 70% of what was traded on the ZSE in 2009.

I spoke to a farmer yesterday who is still curing his tobacco. He welcomed the early opening of the auction floors because he would be able to liqiduate his loans earlier that usual, easing his interest burden. On the downside he pointed out that buyers would be slow in participating because they wanted a properly cured bale. So expect lower prices to start off with.

Just so you know, there a few stocks directly related to the size and fortunes of tobacco crop in Zimbabwe. These are TSL, HUNYANI, CHEMCO.

Investors react negatively to the empowerment law

The ZSE ended on a very depressing note in a week full of negative news. News of the signing into law of an empowerment bill jolted investors resulting in some heavyweight counters posting huge losses. Old Mutual which trades on the JSE and LSE fell to $1.40 from $1.55 last week. On the JSE Old Mutual touched an equivalent of $1.60 in early trades before rounding the day weaker at around $1.57, creating a gap of almost 12.2% with the ZSE price. Econet, one of my favorite stocks in 2010, bucked the trend, gaining some 14 cents from last Friday price of $4,86.

The service industry and retail counters remain popular with investors it seems. Manufacturing counters on the other hand remain week. Today saw an announcement by Star Africa that it is to embark on a capital raising exercise. The jury is still out on their timing of this transaction. No-one can blame them, money must be raised. Who saw the Empowerment bill muted in 2007 becoming law at a time when we are all trying to smart from one of the worst crises ever! Star Africa dropped to 8.5 cents from 10 cents last week.

As pointed out previously, we will see a lot of corporate actions in coming weeks as companies try and restructure their balance sheets.

Money market is back too!

We have all been wondering why everything is at a standstill, why there just doesnt seem to be a way out. The economy is ticking along, growth predictions vary from 3.5% to as high as 7%. Great news! The economy shrunk by more than 40% in the last decade. You would think that this good news would be propelling the market forward but no! The stock market has just gone to sleep and for now it just looks like Investors have simply decided to wait for some catalyst! Could it be an anncouncement from the 3 Principals of the GNU, could it be results from the blue chips such as Econet, Delta, Innscor etc out later this quarter. Whatever it is, as long as it is positive news, our market will take off.

For now however we will have to wait and see what happens. Whilst we wait its important to take stock of what is happening around in the investment markets. Clearly the landscape has changed. We can now talk of having an investment on the money market. This is probably why the stock market is also quiet. There is now a real competing asset class, money market.

It is not common knowledge that there are increasingly attractive interest rates that are being offered in Zimbabwe. On the 30-90 day window, rates are ranging from 16-22%. It is also not a secret that most corporates in Zimbabwe are looking for moeny. So liquidity is generally tight. The little money that is available is going to the highest bidder. Rates of between 3 - 6% per month have been thrown around. Now you do your maths and you will agree with me that these rates are very high. Say you put away $10,000 at 16% for 30 days, you will get an investment return of $107 in 30 days after taxes. After 12 months you get $1360 compounded. That is almost a guaranteed return, unless something terrible happens!

In the hyperinflationary environment we all (risk averse investors included ) rushed to the stock market in order to preserve value. Now that money is real there is no pressure on all of us to invest in one asset class. Infact some investors are finding there way back to the money market. Unfortunately there are no clear benchmarks yet on rates because of the absence of government paper, such as Treasury bills and other treasury instruments.

I read an interesting analysis from a collegue which showed that the stock market's performance since the beggining of the year was fairly good and quite comparable to that of a short term money market investment. If you invested $10,000 on the industrial index you would get a gross return of 2.98% in the month of January 2010 compared to a gross return of 1.33% on the money market for the same period. If you had the guts to stomach the risk of putting your money with some of the higher paying banks, you could get more than 2% per month.

This is exciting news isnt? You can actually get an investment return from the money market that is real and the stock market is more stable than before. There some shares that grew by much more than the 2.98% noted above. This is the reason why most seasoned investors will argue that the stock market remains the best vehicle if you want to realise high returns. I agree 100% with that idea, but i am also saying that the time to have a balanced portfolio has arrived. You need to put some of your money on the money market too. After all Zimbabwe is probably the only country in Afica that is giving you double digit US dollar interest rates.

A word of caution to those who wish to invest in the money market. You will be offered very attractive rates but that does not mean ignore the risk profile of the investment house or bank taking your money. If the rate is too be good to be true it probably is! Some companies are paying as much as 6% per month interest as they are desperate to meet working capital demands. This is clearly unsustainable and decreases the investors' chance of getting their money back.

Trading

Could the year 2010 be a year for traders? (Traders are investors who try and make money by timing the market, they try and buy low and sell high.) It is an art that is learnt over time never perfected. In my view it is not easy to buy something at its lowest level and sell out of the position at the very peak. If it was, we would all be retired by now. Still, with a bit of help from technical analysis and trend reading, money has been made. Some investors who have used this approach claim that they know the exact time to get in and out of the market. Having tried it myself a few years ago, it does work but with limitations. There is strong evidence that it will work if you very close to the market or invest with people who are. The ZSE has seen wide fluctuations in share prices, which make it possible for investors to trade profitably.

The study of trends and market behaviour is called Technical analysis and has been used by many investors to decide on when to get in and out of the market. Indeed in some cases, those who use these tools will even tell you that a price will not fall below a certain level and when this is the case its time to buy. When it reaches a certain price on the way up and doesn’t go above it, they will tell you it is its resistance level and therefore time to sell.

I chose to relate this to our local market this week because I have seen wide fluctuations on a number of shares and I believe that with the right tools and advice these can be exploited. Don’t get me wrong you are not going to get all your reads right every time but you are going to make some money on most of them. I say this because I have witnessed this behaviour unfold on the ZSE quite a few times.

Counters like Innscor (63-72cents), Mash (1.2-2cents), CBZ (15-20cents) Seedco (85-105cents). Around the second week of January Innscor was trading at 72c. Today the price has fallen to 65 cents, a difference of 9%. Take out the in and out trading costs of 4.21%; you are left with a decent 5% profit in two weeks. This is just one example of a trading opportunity. It sounds simple but it is not easy to do. There are few factors that will make the scenery I describe above difficult to replicate or even repeat with different counters.

When you buy in a market like the ZSE where the direction of the market is dependent on news and external liquidity you can never be too sure of anything, so be prepared to hold on to your position and wait for the right time to sell. Another problem is a human trait that is found in all of us. Greed! Once a share price rises we think it is going to rise even further and so we hold until everyone else starts selling and then we fail to benefit from our positions.

What I have been describing above is a short-term investment strategy. In the long-term it always pays to pick growth oriented and value stocks as I discussed in my article last week. Blue chips will always perform in the medium to long-term. In the short term these stocks may not look very attractive and there is no reason for you not to take advantage of these trading positions. Infact the more the market is volatile the better it is for traders. Happy hunting!

Where to invest

BLUE chips continue to attract investors on the Zimbabwe Stock Exchange (ZSE) (Visit http://www.zse.co.zw for live trades). Why? They are strong companies with a proven track record. Who can doubt the strength of companies like Econet, Delta, Old Mutual, PPC, Innscor, RIO to mention a few. By the way few companies make the list of not more than 15 blue chips on the ZSE. More than 80% of the money being invested on the ZSE is going to the blue chips.

Tried and tested business models, proven track records, tangible assets and strong cash flows are some of the attributes of these companies. It is not difficult to spot them. They are large and always post big numbers. Investors don’t like to fumble when searching for value. They know were the value is and are consistently investing in these companies. Keeping an eye on them myself! That is a good recipe to make money in the long-term. You don’t lose sleep over these companies. Given the stable economic environment there is very little space to speculate. Gone are the days when stock prices used to rise by more than 100% a day.

These days if you get a rise of 3-10% per month, you have done very well. Be grateful! Pick your stocks wisely. Due to the uncertainty that still prevails regarding the country future very few investors are willing to take a dip into the unknown by buying middle-tier and small companies. These companies often do not have strong anchor shareholders and are the ones in most need of recapitalization. At the end of the day it becomes a vicious circle, where their failure to mobilize capital leads to them not being attractive on the market. This in turn makes investors shy away from them and so on.

Expect a few exceptions. Some of these small cap counters will outperform the blue chips. The important thing is to try and take positions in some of these companies because in time and as the economic environment continues to improve these companies could easily become blue chips too.

As pointed out last week, the biggest challenge facing listed companies is access to affordable working capital and in some extreme cases lack of money to buy new equipment. Zimbabwe’s economy was in a recession for the last decade and during that time very little was re-invested. On the other hand investors face an even greater challenge of trying to decipher what is happening in these companies. Over the years we had become accustomed to hearing only good news. The harsh realities are starting to sink in now. As investors we need to recapitalize our companies in order to give them a chance in this stable environment where competition is becoming stiff with each day that passes.

Below I have attempted to identify some factors that I think deserve investor focus in 2010, in order to decide what to invest in.

Positives

1. The economy has stabilized (the country has witnessed rapid deflation) this has removed speculative activity in the economy and is encouraging investment into productive sectors
2. Financial liberalization is complete (investors are free to move capital in and out of the country) this has seen net inflows of money
3. Government has not intervened/reversed policies in the economy since adopting multiple currencies (predictable policies make planning easier)
4. Investors are flocking to Zimbabwe in search of opportunities (most investment has been in the mining and telecommunication sectors)
5. For once everyone is speaking positively about Zimbabwe (forget the niggling issues! Who doesn’t have them anyway? They will pass. We all want that to happen tomorrow don’t we?)
6. Money is now real (you can afford to hold cash and still come out right, no need to take unnecessary risks to preserve value)


Negatives

1. Political differences are costing the economy. (investors want certainty and stability)
2. Liquidity remains a challenge in the economy. This has driven up the cost of borrowing (as much as 38% per annum for unsecured lending)
3. There is very little saving in the economy. (This limits the amount of money available to borrowers)
4. The agricultural season is looking uncertain as reports of crop fatigue continue to pour in from the country’s main productive provinces. (this could mean that we will need to import more food, straining an already tight budget)
5. Crisis of expectations is looming large in the area of wages and salaries (threats of strikes etc)

When buying remember not to buy at the top! Don’t say I didn’t warn you. Always buy when the price is low and sell when it is high. It pays in the end to watch price trends overtime before you enter or exit a position. I wish it was that simple!

Things working again

For those who do not know me. My name is Nyasha W. Chasakara. I hold an Economics Degree from the University of Zimbabwe and have been working in Zimbabwe’s investment markets for more nearly a decade. A couple of years ago I used to write on economic and investments matters, offering advise to those who were willing to take it!. I stopped when things seemed to stop working. Who can blame me? Things are working again so I am back. Once a writer always a writer, Right!

It’s a brand new year and we have been using foreign currency as our legal tender for just under a year now. Back in the day (January 2009 to be exact) as my grandfather used to say things were different, our stock market stopped working, shops started selling their products in return for fuel coupons and hard currency ( if you had the licence that is) When hyperinflation was rife it was almost like fiction. Looking back to some of the articles I posted nothing was predictable, planning was impossible and yet all that has changed.

It was unthinkable to let your car fuel tank run to E and then look for the nearest service station to re-fill. You were asking for trouble. Now you can choose which service station you want, what time you want and how much you want. There is no doubt that life is much easier, thanks to the sanity introduced by the use of foreign currency as our legal tender (money). Money is real now.

The important thing is if you are reading this we all survived to tell the tale. Sadly not everyone did. It doesn’t get any real than that. Hyperinflation is something that should never again be experienced in our country or any other for that matter. Those who survived have many explanations on how they pulled through, ranging from God’s will for the devout to sheer genius for those who went to school (the learned ones, the trickisters, the dealers)!

Who has not heard of the term ‘burning’? It became a term used to describe the buying and selling of foreign currency, making margins in the process. Everyone became a mathematician over night, speaking of points, margins, spreads etc. Our survival instincts sprang up and we did what had to be done to survive.

Referring back to the little Keynesian Economics that I can remember we all made our little decisions in order to survive. It all makes sense to me now, how micro-decisions have macro-economic impact. We all pursued real assets, hard currencies and anything that could preserve value, raising prices of everything and because no company was producing enough, we all know what happened afterwards. Our local dollar fell in value becoming unusable, because we invested in consumption.

Enough of the history, Phew! That was then. As I write today we have a functional economy. One, where planning is possible: a prerequisite for success. We now worry less about what tomorrow has in store for us. It is a good feeling to have. For those with spare cash (there is very little of that I available of late), this is the time to take calculated risks and invest in the country.

Judging from the number of capital raisings on the cards by listed companies, the problem of liquidity and capital is not just affecting individuals. Inflation also decimated a lot of companies' capital base, hence the call for new capital. Looking at the just ended African Sun rights offer in which 61% of the $10m they were looking was raised, the underwriter took the rest, so all that money was raised , there is some appetite for Zimbabwean assets. Investors love Afrisun even though it is not making money at the moment. Africansun is what I would call an economic recovery play. It’s a company that will not make you money in the short-term but will make you lots of money when tourists start flooding our hotels. Would I buy it? Yes! Because tourists are coming to Zimbabwe.

The tourism sector just like the telecommunications sector (sweet Econet) are industries of the future, there is heavy capital investment to begin with, followed by years of cash-inflows, as the companies sell an improved product. Disposable incomes will improve so will spending. So do not despair. Your investment will pay off one day. African Sun became one of the first companies to share their financial results with the market last week. They revealed that 2009 was one of their worst years. Management said that their fortunes have already turned. Forward bookings to March reflect a doubling of occupancy in its resort hotels. This coming ahead of the 2010 FIFA world Cup showcase on in neighboring South Africa in June. I will leave it at that. Happy hunting.